Bond Yields - "You Ain't Seen Nothin' Yet"

Tyler Durden's picture

Via RealVision.com,

If You Only Look At One Chart…

Time is short, so here is one chart to get you thinking in a new direction.

Velocity of Money (M2)

M x V = P x T

Source: Bloomberg

The chart that no central banker wants you to see

Velocity and inflation will continue to fall as long as debt compounds faster than GDP growth.

The secular low in bond yields is still ahead of us.

*  *  *

Right Here, Right Now

The best trading ideas of the week from RVP Contributors

Buy some Insurance

Says Stray Reflections

In the past two decades the VIX has closed below 10 on only 11 occasions, and 7 of those occasions were during the past month. Sound normal?

“Low volatility begets high volatility. Some participants shared painful experiences that taught them consistently betting on higher volatility is a fool’s errand. Better to buy puts as insurance when option pricing gets too cheap. With the S&P 500’s realized volatility down to just 7% (it has been lower only 3% of the time since 1928), now seems like a good time.”

Jawad Mian’s report suggests that now may be the time to buy some put options to take advantage of a potential spike in volatility. With the time value of options so low due to suppressed volatility, now might be the time to take out a little insurance. Remember, you can’t get it cheap when you need it most.

Even deeply out-of-the-money, long-dated options could experience an asymmetrical payout in the event of a major unexpected risk event….

*  *  *

The Big Call

Legendary hedge fund manager Stanley Druckenmiller said when you see something in the market that really, really excites you, “Bet the ranch on it.”

These are the Big Calls, the investment themes that can make or break you.

Think differently from the crowd and have a different time horizon, and you have an edge. RVP, with its crack team of financial minds, identifies the Big Calls and guides you through the investment opportunities when they present themselves.

Bond Yields

In Limbo or Playing Limbo?

We often refer to the state of being ‘in limbo’ as stuck on the edge of hell with no resolution… But remember, limbo is also a dance from Trinidad in which people compete to dance lower and lower under a bar until someone eventually collapses. This week in The Big Call we ask, how low can global bond yields go; and what could raise the bar, or will bond yields be stuck at current levels forever?

Bond bull alive and kicking?

The secular trend of declining bond yields has seen prices rise inexorably during a 30-year bull market. Our call from April 7th was to go long TLT on a short-term view – which has returned a decent 3.5% to date. But how long can this return continue in the face of rising leverage and deteriorating demographics? That’s something we considered in the Are You On This Yet? section of The Hack on May 19th

Drowning in debt

Jawad Mian’s thought-provoking symposium this week, A Dozen Ideas to Get You Thinking Differently, sets up our discussion nicely:

“The US economic return on additional debt has fallen to about 20 cents on the dollar. That means 80 cents is servicing existing debt, which has been borrowed for the purpose of supporting unproductive consumption and jobs. This makes economic growth very sensitive to changes in interest rates.”

The diminishing return of each new unit of debt is making it harder and harder for governments and corporations alike to juice their growth and returns. With debt levels so high, the service costs become punishing. To avoid a default, interest rates must remain structurally lower for longer just to support the present debt. Furthermore, the debt has to grow just to service the exisitng debt. Think about that for a second?

Are higher rates already the death knell for the US economy?

“It would only take a 20% backup in interest rates before the debt service becomes problematic (depending on duration and the amount of outstanding debt). The 10-year Treasury yield nearly doubled from the summer 2016 low, which suggests the US economy is about to slow down, rather sooner than later.”

The economy is slowing, and yet with these debt levels across the world, the growth rate required to get out from under them is essentially mathematically impossible to achieve:

The path of least resistance for central banks becomes structurally lower interest rates, since a widespread debt jubilee is too politically unpopular, for now. That comes later.

Central banks are stuck between a rock and a hard place.

  • how to prevent those low rates blowing up (even bigger) asset bubbles
  • how to keep banks profitable so they can recapitalise organically
  • how to have any levers of monetary policy left during the next major downturn

Across the world central banks are in a bind, and so developed bond markets are sleepwalking toward a Japanese-style scenario of negative bond yields and a deflationary psychology.

*  *  *

Global bonds – The world tour

China

At the government level Chinese debt-to-GDP looks very reasonable at around 43%; but if we add in all the local debt, state-owned enterprises, and other forms of debt we get estimates of more like 250% of GDP, which makes China look rather Japanese. China does, however, have one advantage, which is a high GDP growth rate that can be used to shrink that debt load – but with so much growth generated from debt-fuelled investment rather than consumption, it will be hard structurally to grow the economy whilst weaning it off the debt.

Chinese government bond yields have been on the rise, which may actually reflect positive fundamentals in the economy. As Jim Walker’s Wealthy Nations observed in March,

“The rise in rates is a reflection of success and economic acceleration, not a reflection of economic problems. China will increase interest rates not because the authorities are worried about over-indebtedness and/or the amount of credit being extended.”

Cyclically, then, China seems OK for now – the PBOC has been stepping in with liquidity when needed as they try to steer the economy towards some corrective actions. However, the jury is out on how long they can keep this up.

For more in-depth consideration of Chinese debt dynamics, remember to check out CrossBorder Capital’s “The Financial Silk Road”.

US

The 10-year Treasury currently yields around 2.2%, a very low return by historical standards, especially when debt-to-GDP has ballooned to over 100%. Both metrics are now at their post-war level. Will foreigners question the US’s creditworthiness and abandon their debt?

As long as the USD remains the global reserve currency, demand for dollar debt will be high; and only the US bond market has the depth for this size of capital flows – i.e. many holders of Treasuries buy them for reasons other than risk/reward.

OK – but the world could abandon the dollar… Sure, but what’s the next largest alternative? The euro…

Greece

The Grecian debt crisis is now entering its seventh year of tedium. In that time debt-to-GDP has mushroomed from 126% to 179% – a debt level no nation has ever emerged from without some form of default or devaluation. Yet Greek bond yields have fallen from >30% in 2012 to just under 6% today.

With a succession of bailouts, Greece has trundled along on life support. As the old Soviet joke goes, ‘So long as they pretend to pay us, we will pretend to work’.

But what do people who want euro-denominated collateral do, then?

Germany

The 10-year yields are on the floor – 0.25%! This is due to a flight to quality in the Eurozone: If the EU breaks up, you are best off with bunds because the Germans have greater fiscal rectitude (although debt/GDP is still near 70%), and a new Deutsche Mark would be worth a lot more than a freshly minted drachma.

So what are we learning here? Bond yields – especially government ones – are not really reflecting economic risk/reward anymore. They reflect a belief that central banks will ease into perpetuity – or at the very least a belief in the ‘greater fool theory’.

This isn’t theoretical economics confined to classroom textbooks; we only have to look to Japan to see this train wreck in action.

Japan

Japan has a debt-to-GDP ratio of 250%! Yet the 10-year bond yields just a handful of basis points. What could possibly explain this? Deflation. Decades of deflation have meant that owners of any fixed monetary asset will see its value increase over time. Japan was stuck in a debt-deflation cycle until the recent advent of ‘Abenomics’ – the competitive devaluation and money-printing game that everybody else had been playing.

Either way, Japan has avoided default through extremely low interest rates, extremely high domestic bond holdings, and a highly cohesive society, all in combination with a weak currency and an export-led economy. Is this the future for other developed sovereign bonds?

The BoJ have only a plan A: Buy up all the bonds in issue. And after that? You can be sure that Japan will be at the vanguard of the next economic and monetary experiment. Remember that debt jubilee I mentioned?

Japan Debt to GDP vs Japanese Bond Yields

Source: Bloomberg

Could we see a bond scare?

The reality appears to be, it’s unlikely. Yes, an individual country like Greece can suffer a huge bond scare, but for larger nations with printing presses such as the US and Japan, the most likely outcome is simply more debt and more devaluation. And with plenty of money sloshing around chasing too few assets, bonds will probably continue to be bid.

The only thing that would reliably kill the bond market is higher interest rates from central banks. The trouble is, higher rates would also kill the market for everything else and trigger a depression.

Could an inflation scare occur? Demographics, unproductive debt, and technological advancements put the chance of a sustained period of inflation pretty low, despite (or because of) the best efforts of Central Bankers.

 

Baby Boomers are compounding the problem.

As we noted in The Hack on April 7th, ‘Baby Boomers Coming of Age’, the backdrop of an ageing demographic and massive pension black holes will structurally cap any rise in interest rates.

‘According to the Federal Reserve, unfunded state and local pension obligations have risen to $1.9 trillion from $292 billion since 2007. Throw in the private sector and that figure is far greater. At the same time pension funds have been pushed up the risk curve as interest rates from fixed income are simply inadequate. Baby Boomers have never been more exposed to equities and are going to start to drawdown their capital for retirement.’

The paradox is this: To fill that black hole and provide fixed income for retirement, we need bond yields above, say, 5%; but with yields above 5% the ability to service the debt mountain collapses and assets are liquidated. Wealth is devastated. Then, all those retirees will be shifting assets from equities into fixed income in the next decade, driving a huge wall of money into a bond market with diminishing yields.

 

What about cyclical considerations?

We have been stating for some time that the credit cycle is rolling over. Just last week Michael Lewitt noted:

“I no longer expect interest rates to rise significantly from current levels in the current cycle; they are more likely to fall as the economy stays weak and debt continues to build in both the public and private sectors. We could see short-term 25 or 50 basis point spikes in longer rates (10–30 years) based on an errant comment by a central banker or some piece of news, but rates are likely to stay down until the current business cycle, which is very long-in-the-tooth, ends.”

With the Fed raising rates into a slowdown, they will have to backpedal in the near future to soften the economic blow.

How low can we go?

The limbo continues – and the bar goes lower. For now, it is hard to see any alternative to more debt and lower rates. The inflection point where we could grow our way out of this debt straight jacket has passed.

The secular low in interest rates appears to still be ahead of us.

Are You On This Yet?

In such a fast paced world staying on top of relevant market news and developments is tough. RVP scours the globe for the most interesting stories and distils them, keeping you ahead of the crowd.

Brexit

Tax-it?

Brexit may be hanging in your mind as one of those tail risks you are supposed to worry about but cannot quantify. In The Hack for May 26th we looked at the importance of UK/EU trade and politics amidst what appears to be a messy divorce with a potential EUR 100bn price tag.

The EU debt crisis remains the elephant in the room, with poor demographics, massive welfare commitments, huge debt loads, and a one-size-fits-all currency to bind the mix – the potential for a full-blown crisis remains as real as ever. Is the UK just the first rat to leave the ship?

 

Is it all doom and gloom for Britain?

This week Eurizon SLJ Capital published an excellent report outlining the potential opportunity for the UK to become a tax haven upon exiting the EU. What if Britain just refuses to pay the ransom note, endures a hard exit, and then steals all the EU’s corporate business? What if the breakaway from the EU allows Britain free rein to shape its own industrial policy?

Stephen Jen of Eurizon SLJ Capital argues that once free from EU encumbrances, the UK could move forward with corporate tax cuts to fuel greater inward foreign direct investment (FDI). The UK is already the greatest recipient of FDI in Europe. The UK has a strong base of FDI due to credible institutions, strong rule of law, the English language, high-quality human capital, and good infrastructure. The opportunity for greater future FDI could be huge if the FDI stock matches that of other tax havens as a % of GDP:

Check out Switzerland, Ireland and Luxembourg.

Source: OECD , IMF, Datastream and Eurizon SLJ Capital

UK in the Sweet Spot

If the UK sparks a boom in FDI, taking business away from the Eurozone by having a more competitive corporate tax rate, that shift would have effects akin to the competitive devaluation of currencies we have seen since the GFC.

But tax havens act differently: They have to be small enough to attract business away from larger economies but still large enough to retain the social and economic depth required to support large businesses. Britain appears to sit in the sweet spot:

“In the middle – what we call ‘Middleweight’ economies – we may have a sweet spot for corporate tax cuts. The loss in revenues from the reduction in the tax rate may be easily offset by the new inflows of foreign investments. If the costs for a company of operating in London were driven lower, we believe this would tilt the balance on FDI flows away from, say, Dublin. The point here is that larger and more sophisticated economies command a premium on smaller economies that can.”

This analysis gives a read across for the Trump tax cuts for investors. As the US is a ‘heavyweight’ and really operates its tax system under its own gravity due the sheer weight of its GDP and global importance. In the case of the US, cutting corporate tax may actually hurt the fiscal situation rather than having the impact of attracting enough FDI to compensate for the tax cut.

Surely cutting taxes blows up the fiscal balance sheet?

It may be that reducing the corporation tax rate further to a ‘sweet spot’ actually attracts more investment from abroad and results in more job creation in the UK, putting money into the pockets of residents and giving the government a greater tax base from personal income. Corporate tax is after all a form of double taxation – both the corporation and its shareholders are taxed on profits and then dividends.

There’s got to be more to Britain’s chance of success than just tax cuts?

To have a winning formula you also need industrial policy:

“It would make sense, in a medium-sized economy like that of the UK, for there to be (i) more guidance and leadership from the government and (ii) concentration of financial and intellectual resources in the development of industries… In a globalised economy that offers ‘winner-takes-all’ propositions, or non-linear financial rewards, there is a role for the government to lead and nurture the industrial development process, in our view.” 

Currently the UK ranks no. 7 in the World Bank’s Doing Business report, above Germany, Ireland, and Austria. Denmark is the only member of the EU to rank higher. If Britain can continue to attract FDI and see it invested wisely in profitable and scalable sectors, there could be a winning formula on hand for greater growth outside the EU.

Even if you have Brexit exhaustion, you need to read Eurizon SLJ Capital’s analysis – it is incisive and comprehensive and deserves to be a white paper floating onto the desks of leaders across Europe to drive forward some more functional politics.

Does Theresa May have the balls?

Britain has its destiny in its own hands. It needs a bold government to make some bold decisions, but otherwise, all the ingredients are there for success.

 

So Much Volatility, So Hard To Find

Picking up pennies in front of steamrollers…

Volatility is an oft-used measure to gauge risk in financial markets. This week we explore a few facets of volatility; and we ask why, with so much uncertainty in the world, is volatility so low?

Jawad Mian’s Stray Reflections this week explores the correlation between the VIX and the Global Risk Index.

What is Volatility Telling US?

VIX vs Geopolitical Risk Index (rhs)

Source: Bloomberg, Federal Reserve Board, Goldman Sachs

Is VIX is a poor measure of risk?

Despite rising geopolitical risks and lofty market valuations, the VIX Index has been recording new consecutive lows. In the past two decades the VIX has closed below 10 on only 11 occasions, and 7 of those occasions have been during the past month. Jawad rightly asks, ‘Are we going to see policy uncertainty decline and volatility stay lower for longer, or are we about to enter a higher volatility regime?’

Volatility tourists?

JP Morgan’s Marko Kolanovic sees the death of the human investor as one of the key drivers of declining volatility. Only 10% of trading volume is currently derived from fundamental discretionary trades. Quant strategies and ETF algorithms are accounting for most of the trading, and their setup represses volatility. This happens because many of the quant strategies follow the same big-data and trend-following factor-based approaches. Volatility has been trending so low that yield-seeking ‘volatility tourists’ are joining in the party, seeing the low VIX readings as a chance to gain some yield in an apparently benign macro environment.

Show me the volatility!

To put it another way, it is quite possible that the sheer weight of money currently flowing into short volatility positions, the implied central bank put, and the rise of passive investing and quantitative funds may be clipping potential volatility. Taking a different slant on our recent featured piece from 720 Global, these forces are making the graph on the left look more like the one on the right;

Source: 720 Global

What that means is that the volatility of actual returns is increasingly resembling a random walk!

OK, I sort of get it – but what’s the big deal about volatility?

Here we must cede to a master class from Chris Cole of Artemis Capital, whose ‘Volatility and the Allegory of the Prisoner’s Dilemma‘ is truly a piece of essential reading for any investor. If you want to get a handle on this crucial concept, you need to watch Chris’s Realvision TV interview. One of his key mantras is this:

“Risk cannot be destroyed; it can only be shifted through time and redistributed in form.”

Currently, suppressed volatility is merely storing up risk for the future, explosively; and the principal reason for this is that market participants believe central banks will be there to backstop any future random events that would otherwise cause significant stress in the market. Of course, this unwavering belief invites moral hazard and is driving the trade in shorting volatility. Central banks are in effect driving up the occurrence of apparently ‘everyday’ events and pushing out tail risk:

Source: Artemis Capital, Bloomberg

The key takeaway here for investors comes when Chris says, ‘Peace is not the absence of conflict.’ A simple way of thinking about this is that the active conflict between bulls and bears discovering prices in the market each day is for now being drowned out by the waterfall of cheap money pouring down from central banks. But the bulls and bears are still there – waiting.

Here’s the bottom line.

When a risk event occurs that a central bank can’t or won’t step into, the volatility tourists are likely to be ruined, and the markets will be primed to for severe dislocations in pricing – something which the quants and algos aren’t programmed to navigate.

Staying Ahead

There isn’t time each week to discuss everything that is going on in markets. Here we piggyback on previous RVP Weekly Hack talking points and let you to explore some stories further.

Who hit the bid? The SNB did.

If you need a sign of the times, check out the breakdown on the NASDAQ holdings of the Swiss National Bank. As the SNB fights to reinvest its vast foreign exchange reserves, it has become a large buyer of US tech stocks. In fact it now owns 3.75% of Apple and 3% of Amazon!

In the first quarter the SNB increased their holdings of US equities across the board by ~25% – hardly selective buying. It seems some central banks are in fact propping up the markets in quite a direct fashion. When we think about the meteoric growth of passive investing, we need to consider that ETFs may not be the only price-insensitive buyers – there are institutional ones, too.

Tech companies make ripe pickings.

Are US regulators now looking to initiate trust-busting moves against the big tech companies? With the likes of Amazon and Google becoming increasingly dominant in their chosen fields – and choosing new fields every week – the motivation and incentives to increase regulation of these sectors is obvious.

There is a geopolitical angle here. In the period following the GFC, the US extracted a number of fines from European banks that needed to shore up their finances, whilst the EU engaged in various trust-busting activities against the likes of Facebook and Microsoft. Think of this as a kind of modern resource nationalism.

Are the US regulators about to turn on their own?

 

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pitchforksanonymous's picture

I think the FED gets a kick out of reading ZH and then reaching over and pushing one of 5 buttons.

 

1. Dow up 20

2. Dow up 100

3. Dow up 0-10

4. Down Down 20

5. Dow Down 40

 

click. LOL

slimycorporatedickhead's picture

Broke donkeys with high debt and no savings are getting $300,000 mortgages at 2.79%, this is a joke. In a free market, these people would flat out not qualify for a mortgage or if they did they would pay 12-20%. Lambs being led to slaughter.

Stuck on Zero's picture

The economies of today consist of billionaires shuffling money around in financial instruments. Economies should be measured by the spendable income of the citizens.

AllOfGood's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

DieselChadron's picture

whoever said anything about a free market?  seems we're all just "lambs being led to slaughter".. in the end, the banks own everything.  besides, if they can't generate household credit, they'll have another $1trillion plus public deficit that never passes congress.. and surely you'll complain about that too.  

ps. the system requires additional debt to pay yesterday's interest.  the "broke donkey" public get high debt and no savings.  the fat cat bankers get hookers and blow.  hate the bankers, not the broke donkeys ;)

Slomotrainwreck's picture

If the US Government and FED did not exist, what news would be in the headlines?

 

Crypto-World-Order's picture

"Millionswilldiemannarino" had a video about yield curve today

blue51's picture

Hehe. ^^ perfect nickname  for him .

DingleBarryObummer's picture

He has been saying housing is in a bubble and not to buy for at least a year.

VangelV's picture

Sorry but I don't get it.  The simple fact is that the rates are now based on actions of cartels that get to print money that governments force people to use.  But with the rise of cryptocurrencies and of the ability to connect electronic payment systems to physical metals such as gold, silver, platinum, etc., I do not see how the game gets to continue indefinitely.  The simple fact is that there will come a point where nongovernmental actors will refuse to hold currencies or to lend to the financial sector at rates that guarantee future losses.  Sure, bonds could do well for a while but the bottom line is that they are still based on the value of currencies that will keep losing purchasing power.  

null's picture

One would think so.
But in reality, how many NG actors are truly not tightly coupled to some government?

Cutter's picture

Agree, but they are delusional.  Cryptocurrencies still rely on a highly regulated internet infrastructure, often owned by the government, over which they are transmitted. Infrastructure which crosses borders.  

The internet hasn't been truly free for many years.  It can be lightly regulated as in the US, or highly regulated as in China.  And any government could shut it down tomorrow.  

All they would have to do is outlaw the transmission of any cryptocurrency which refused to comply with their regulations.  If the FCC threatened internet providers with penalties or jail for allowing bitcoin transactions, in a way very similar to the way the government imposes civil and criminal penalties on banks suspected of allowing criminals to launder money, there would be no way to transact. No intenet provider would risk their license to do so. 

Unless the cryptocurrencies came up with a wireless method, which has its own set of problems and limitations, the cryptocurrencies will be at the mercy of government forbearance. 

Cutter's picture

No currency, including cryptocurrencies, will be allowed to invade government's control over printing and distributing currency.

That's the danger in the cryptocurrenices. They will rise only to the point at which governments deem them to be a threat, and then they will either be banned, or regulated to the point they lose their attractiveness.

gold rubeberg's picture

It's a rock and a hard place all right. While lower rates would be putatively stimulative, they work by encouraging the assumption of yet more debt, hardly the solution to over indebtedness.

Fundies's picture

Bachman Turner Overdrive.

Doom and Dust's picture

The report on Brexit requires a login but I can smell the horseshit right through the paywall.

The UK in a 'sweet spot' as a tax haven? It's over ten times larger than the biggest ones. Corporation tax is already way below other EU countries - which CONTROL these rates themselves btw.

The UK is finished. Massive currency crisis incoming.

 

gatorengineer's picture

Let me summarize

Rates go up jew bankers get rich

Rates go down jew bankers get rich

Goy get screwed either way

LittleGreenMan's picture

Leave Jews out of it, and I agree with you.

Stormtrooper's picture

Wait!  Without reading all of the drivel in this article, the first chart caught my attention.  The BOJ, having driven up their assets to 400, 500, 600% of GDP or wherever they are at now have actually created a higher velocity of money than the rest of the world.  Their policies MUST be working.  Are you paying attention Mr. Yellen?  The Federal Reserve should continue printing money until your assets reach 1000, 2000 or 10000% of GDP.  That is obviously the ticket to prosperity.   Don't back down now.  You are clearly on the right track.  Ignore all of those fundamentals.  Obvious poppycock.

ElTerco's picture

"Velocity and inflation will continue to fall as long as debt compounds faster than GDP growth."

Exactly. Roll back tax rates in the USA to the levels in the 1940s and 1950s and pay down the debt. There is more than enough revenue there to reinitiate (literally) productive growth in the economy at the same time. The problem with the current system is that tax-breaks are re-invested into the stock market rather than being invested in the formation of new business. If the people getting the tax breaks aren't going to form new businesses, the government needs to redirect revenue to kick start the business formation process themselves.

https://d3fy651gv2fhd3.cloudfront.net/charts/united-states-government-de...

Congress, get a clue and take a stab at saving the United States of America, instead of wasting your time squabbling.

illuminatus's picture

So I'm supposed to believe that VIX is not manipulated?

El Hosel's picture

Sounds new normal to me. Embrace the Ponzi, deny deny deny reality.

Dilluminati's picture

These are the type of very succinct articles with equations why I stumbled upon ZeroHedge and read here.  The velocity of money is indeed slowing, and as that lags rate adjustments we have turbulence and contraction ahead.  It was just as the M3 reporting was being eliminated, (that itself a canary in the mine) when I initially started thinking on the topic from a long commute to and from the IMF.  Debt is indeed growing faster than M2 (and I'm using the clasical M2) money available through checking and un-encumbered cash, fees alone at banks and NPL's (non performing loans) under the M3 umbrella.  But let me stop and ask the question: if Joe six-pack grabs $100.00 at 3% atm fee or $3.00 service fee, is money on aggregate being destroyed?  What about western Union fees?  And rhetorically an equation answers the question thus: on those at the bottom end economically it does!  However lets look additionally on the limit imposed by withdrawal!  For those who immediately observe the money was transfered to the bank or company that owns the ATM, well Bravo!!  Hooray for logic, but when you again look at the velocity of money in the real economy you should conclude it is indeed slowing along with GDP, etc.. a bubble like we see in the markets might distort short term tax receipts, but not for long.

I have had the last two weeks to do some more long rides to a new job, and it reminded me though we can be experts in a given area we need do nothing but change a position within our employment to conclude we don't know as much as we think we do.  Smart organizations purposefully rotate their top people periodically, it not only allows them to reinvent themselves but also forces them to re-evaluate their prejudices.  I escaped the Tyranny of "experts" who had 30 years experience and now instead evaluate what, how, and why a process works and functions without a bias of my own.  And as I was driving these last two weeks, Bloomburg and Cspan thought to myself that we don't know we are in a thought trough until we get out of it, some get pushed, some jump, some retire and nonetheless science tells us that these new ideas or new jobs are top-five stressors. (take a deep breath and chill the tits and accept that that is natural)

But everything I know about calculating money tells me the economy is contracting, I wrote the software for both student debt, and IMF reporting, and politics and math are two different subjects.  And becasue I understand the math I also naturally gravitate to articles on the topic.  But yes the bond people have it correct and the Fed got it wrong on the last hike, moreso the problem is deeper.

Disagreements by long-term experts are the most exasperating and destructive, and that is why again smart orgs force their leadership to rotate.  There are some environments where ongoing disagreement is counter productive to mission.  As an example congress: If say Pelosi was forced to represent rural alaska her gun control position would mature.  Conversely: the representative of Baltimore or some inner-city would see a new truth.  Our current leadership isn't leading they are instead infatuated with prejudices and ego, something all of us fall into and only recognize when we are forced again to re-invent ourselves and acknowledge not that we are experts but have allot yet to learn.

Our Congress and Fed Reserve aren't learning.  Their tools are outdated and the metrics innefective.  The worst part of this?  The public senses it.  Success is now how well you battle within an environment for control of a process that doesn't work because of the in-fighting.  That is unacceptable in nuclear energy environments for energy production or leading an economy.  

While admitedly macro economics is complicated and no single person can understand it all, the prejudice that went into the last rate hike with the overwhelming data to suggest that wasn't wise reasonably leads one to qestion if our congress, senate, fed reserve etc.. these institutions are more interested in winning an ego argument instead of producing results?

I have been consistent long the ten year and locked in myself a "M3 threshold amount" at %2.83 averaged, and as money gets destroyed via the next valuations correction you will see how damn smart that was.   And if I can see it, see it transparently, then I wonder what rational is behind the policy?  There are some places where a food fight should be walked away from.  I'm surprised that congress members who were shot at haven't looked into the mirror and asked: is this ego trip worth this?  Is anything being accomplished? Is there something somewhere else I could be doing more and growing?  And if it is servcie and they all give lip service to that~  why are they still slinging mud?

We live in a new and frightening age where people talk of kinetic and non-kinetic approaches to solving challenges and they do so by open warfare and outdated assumptions, and that folks is fucking scary.

In closing, and I shared this before: you want to re-evaluate prejudices but start with your own!  Everthing that you were told about bonds is factually wrong.  In a tax deferred IRA account YOU SHOULD HAVE BOUGHT when it was at %3.00   cussip DSH6C2242

I'll get a chance to ask the brokerage appointed churn advisor here short enough.. was that wise??  Let's see madame defarge knitting patiently not because she has an axe to grind but instead because she has no option but to be the observer. 

Our leadership is now hand in a jar grasping outdated arguments in a fast changing world, they want to legislate the internet, they should instead legislate their own behavior...the fact that none of the members who were shot at didn't resign underscores my point, it changed NOTHING!   They cannot change themselves yet again, which admittedly isn't easy.

Take all of your personal M1 and go long the ten.. you'll need that money someday when you retire

Let it Go's picture

Never before do I remember seeing so many predictions of interest rates remaining low forever and a day. Many of us have a problem lending hard earned money out for a long period of time and we should be wary. Rates are based on predictions of future government deficits and events around the world that may or may not unfold as expected. The article below delves into whether the bond market is a bubble phase and the ramifications facing us if it pops.

 http://brucewilds.blogspot.com/2015/12/bond-market-bubble-ending-has-massive.html

1033eruth's picture

Federal Reserve said they are going to start shrinking their balance sheet.  Which would be something of a miracle by itself but lets say they painted themselves into a corner and now they are forced to do so before pension funds start going broke nationwide.

From the article above:

The secular low in bond yields is still ahead of us.

 Lets assume fed isn't lying to us about shrinking the balance sheet.  

Who thinks the secular low in bond yields is still ahead of us if the fed starts shrinking?

Up vote yes
Down vote no

I'm down voting myself.  Its obvious to me with the fed raising interest rates into a collapsing economy that they have no choice in the matter and they have to force interest rates higher for the benefit of pension funds nationwide.  The above author talking about velocity of money and the rest is full of horse puckey and that bond yields are going lower - Not going to happen.  The Feds hand has finally been forced (and you know things have to be really, REALLY bad before they would do that).

Cutter's picture

Good comments. I think in the absence of a bond event, they will go lower. Probably much lower. The 10 year could go sub 1 percent. The FED is raising now because they are anticipating recession down the road, and they want to have ammo to combat it:ability to lower rates and balance sheet flexibility.

The next recession will likely make 2007 and 2008 pale, so they will really have to force rates down.

Essentially the FED and our politicians have decided they want us to be Japan.

But there is a black swan here that does entertain me. Pursuing the Japan policy does inevitably lead to a bond crisis. When, no one knows. Everyone seems convinced that the central banks can maintain total control over rates. But this makes no sense to me.

When the switch does flip, and investors decide JGBs or Treasuries are not a safe investment, there is no way the Central Banks will be able to control rates. With these debt levels, and the only plan being to add more debt, they will have to hike rates significantly to attract money.

So short term rates are going down, long term they could skyrocket.